By Capitalist Exploits. Originally published at ValueWalk.
In the movie “The International” Clive Owen plays the part of Louis Salinger, an Interpol agent trying to bring down the world’s largest bank.
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In this clip a banker explains things to him:
Umberto Calvini: [In explaining the “true” nature of banking in the world]
“The IBBC is a bank. Their objective isn’t to control the conflict, it’s to control the debt that the conflict produces. You see, the real value of a conflict, the true value, is in the debt that it creates. You control the debt, you control everything. You find this upsetting, yes? But this is the very essence of the banking industry, to make us all, whether we be nations or individuals, slaves to debt.”
Debt is much like a baseball bat: neither good nor bad. You can use it to hit the ball out of the park or you can get beaten into a bloody pulp by it. How we use (or abuse it) is the determiner. Read my article on the easy and uncomplicated way to get rich to ensure you go about it the smart way.
Certainly debt can – and has been used – to control people, assets, and entire societies ever since we crawled out of the cave and began covering our bits with fur. Just ask your neighbour Billy, who’s always complaining about his sh*tty job, why he won’t shut up and just quit? The answer typically is because his mortgage and car payments won’t let him.
I’ve been thinking a lot about debt lately. Not the consumer driven silliness highlighted by Billy but specifically how debt is used as a tool on an international and political level and how it affects currencies and geopolitics.
I then looked at the unfolding trends present today. Trying to see how they all fit together is, I believe, a valuable exercise, even though there’s more moving parts to this than a silo full of Swiss watches.
To begin with, let’s revisit some recent history of debt, currency, and deficits and how they’ve interacted. George Soros articulates it very well in his book The Alchemy of Finance when describing what he called “Reagan’s Imperial Circle:”
Keep this concept in mind as we’ll revisit it in a minute.
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Trends
Fast forward to today, and there are some dramatic shifts taking place in the world:
- Bureaucrats in Brussels, who specialise in overpriced corporate lunches and finding new ways of spending their unjustifiable annual bonuses, continue to berate the “PIGS” for not doing more about austerity. Ironic but the truth is Brussels controls the PIGS much in the same way the bankers in the movie The International controlled the world
- Across the Atlantic we have the sexiest first lady in forever elected, and now we enjoy her orange husband bring a whole new level of ridiculous to Twitter, a space previously owned by the Kardashian’s posteriors. I’m still undecided which is worse
- On the shores of the murky isles, Brits marched boldly towards independence only to realise in shock that they had a completely inept leadership and not a single able minded option available to them. And so they did what any pissed off aggravated person would do: they began voting for Jeremy Corbyn. Not because anyone wanted him in power. Hell no! Purely in protest
- And so, while much of the West increasingly looks dysfunctional, lost, and confused, China are embarking on the most ambitious project ever since I tried to convince my now wife that a hot girl should marry me. The project? One belt one road (OBOR), which impacts many industries and countries such as Greece.
In many ways China has many elements in their favour whereby they can use their increasing economic prowess, large trade surplus, and existing overcapacity to control the debt of trading partners, and in so doing slowly but surely influence politics and economics in a self reinforcing cycle.
Incidentally, if they’re successful in their OBOR endeavours, they can hope to mitigate some of the fallout from an impending and overdue domestic non-performing loan cycle.
Commentators on OBOR seem to fall into those who are bullish… and those who poke fun at it and either don’t like it or question China’s ability to pull it all off. On the face of it the idea seems simple enough. OBOR promises to open up markets for Chinese exports. This is, I think, somewhat simplistic and naive.
The more I’ve researched the topic the more I think there is much much more to OBOR than meets the eye. The Chinese are many things but stupid is not one of them.
Let’s take a look at some of their problems, their ambitions, and how and why OBOR really is front and centre for Xi.
Overcapacity
We know that too much of anything is bad for us. Just ask Chris Christie’s arteries.
China suffer from too much capacity as well as too much domestic debt in their banking system. OBOR may provide a means for China to deflate this debt while exporting overcapacity.
What’s more is that they can do so while providing credit (at the state level) to countries who are in desperate need of it. Greece, as I mentioned last week, fits this picture particularly well.
Deflating the Domestic Credit Bubble
China has a domestic credit problem, and they’re going to have to deal with that in some way or another. Certainly a harsh non-performing loan cycle can punish GDP growth but consider this…
What if China essentially moved this domestic debt problem onto the balance sheets of OBOR partners?
How?
By the Chinese government lending these partners money for large infrastructure projects (as they’ve already been doing). When those infrastructure projects get built, a decent amount of the project works go to Chinese companies which provides them the ability to both export overcapacity all the while deflating some of the domestic credit bubble.
A pretty damn smart move if you can pull it off!
China has some $3 trillion of paper which they can trade for power and influence.
Think about it, which would you rather have: a pile of greenbacks (with the Fed at the helm who have shown in no uncertain terms that, when push comes to shove, they’ll forego monetary stature for domestic political security) or political and economic leverage globally?
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China’s answer is pretty clear based on what they’ve
The post THIS Is How China Is Increasing Global Power appeared first on ValueWalk.
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